Retailers face limited sales growth

HOLDING STEADY Rising consumer prices look set to cut into retailers' margins this year as this will cause households to cut back on expenditures, analysts say

By Jackie Lin / STAFF REPORTER

After enjoying a year of marked revenue growth and challenges from several newcomers, retailers will have to guard against the possible fallout of rising consumer prices as their performance this year is expected to only maintain the status quo.

"There will be no substantial increase in retailers' sales from last year," said Neo Lee (李承瀚), a researcher with SinoPac Securities Corp (建華證券).

"As long as there are no unexpected events like the SARS epidemic in 2003 or a sudden economic slump, the retail sector will not experience big changes this year," he said.

Hypermarkets, convenience-store chains, department stores and other retailers together created NT$570 billion (US$18 billion) in sales for the first 10 months of last year, or a 7.64 percent increase from the same period in 2003, according to figures released by the Ministry of Economic Affairs last month.

But Lee predicts that rising consumer prices -- not a looming economic slowdown -- will eat into retailers' profits this year.

The Consumer Price Index rose 1.62 percent for the whole of last year, the highest level since 1998, when it was 1.69 percent, the Directorate General of Budget, Accounting and Statistics reported on Wednesday. The agency predicted 1.88 percent growth in the index this year.

"Price increases will create a `crowd-out' effect in household consumption as consumers will be forced to restrain unnecessary spending," Lee said.

While a combination of new mega-stores and easier access to credit had raised hopes of higher revenues for large discounters last year, the result was rather disappointing.

hypermarkets

For the first 10 months, hypermarkets posted NT$117 billion in total sales, down 1.17 percent year-on-year, according to the ministry's statistics.

"Retailers weren't adding stores at the pace they used to," said Jennifer Wang (王琇姿), associate director at ACNielsen Taiwan's retail measurement services, as she explained the cause of contracting revenues.

"On the other hand, the slowdown in adding stores pinpoints a hidden concern over the government's land-zone regulations," Wang said.

Echoing Wang's view, Kaufmann Wei (魏正元), president of RT-Mart (大潤發) hypermarket, said the development of large discounters in Taiwan is becoming difficult because traditional wet markets remain exempt from government regulations.

Looking ahead, pressure on discounters from higher materials prices is imminent, which will erode gross margins as competition heats up.

"Developing more own-brand products and expediting mass procurement should be the way out, and to secure the biggest profits," Wei said.

Jeff Lai (賴建都), professor of advertising at National Chengchi University, held the same view, saying that consumer demand can be created, especially when retailers are seeking to branch out in the market.

For convenience-store chains, the compeitition is even more cutthroat.

convenience stores

Industry veterans estimate that there will be more than 8,000 convenience stores serving the country this year, meaning each outlet will serve fewer than 3,000 customers, mirroring the situation in Japan.

Indeed, the net increase in convenience stores saw the biggest jump in 1999, when 1,002 new stores were opened, resulting in an annual growth rate of 25.38 percent.

But growth slowed to 9.06 percent in 2003, when 554 new outlets were opened for business, the Fair Trade Commission reported in November.